Recent Court of Federal Claims Bid Protest Decision Highlights Little-Known Issues

Recently, the U.S. Court of Federal Claims held in favor of a construction contractor in a bid protest action that was brought against the U.S. Postal Service (the ‘‘USPS’’) in connection with the award of a contract for a heating, ventilation, and air conditioning system in Portland, Maine. See J.C.N. Construction, Inc. v. United States, COFC No. 12-353C (Nov. 6, 2012). The Court’s decision in this case is noteworthy because, among other things, it highlights little-known issues and risks that exist when contracting with the USPS and it serves as a great opportunity to examine the USPS’s unique bid protest process.

In J.C.N. Construction, Inc., the contractor argued that the USPS improperly evaluated offerors’ proposals and acred arbitrarily and capriciously throughout the procurement. Specifically, after the contractor had successfully protested under the USPS’s bid protest process (which will be discussed in detail below), the contractor contended that the USPS treated it unfairly by allowing the awardee to have inside information about the true scope of work and relaxed scheduling requirements. Indeed, when the awardee’s prior contract was not terminated for convenience after the contractor’s initial successful USPS-level protest, the awardee was able to significantly reduce its price under the revised solicitation because its bid and insurance costs had already been paid for under the original contract award and the statement of work overstated the work. In short, the contractor argued that the USPS’s mishandling of the procurement provided an improper advantage to the awardee and constituted a breach of the USPS’s implied duty to consider proposals fairly and honestly in an earlier solicitation for the same work.

In response to these claims, the USPS argued that the contractor waived its claim associated with inaccuracies in the second solicitation issued by the USPS because, according to the USPS, the contractor did not raise these inaccuracies with the USPS before the close of bidding. In addition, the USPS argued that the court did not have jurisdiction over the contractor’s claim that the USPS breached its implied duty to fairly and honestly consider the contractor’s proposal. However, the court rejected the USPS’s arguments in this regard, finding that the inaccuracies in the second solicitation were latent and that the USPS, not the offerors, was in possession of information regarding the scope of work that had been performed by the awardee. Moreover, the court held that it had jurisdiction over the contractor’s claims for breach of the USPS’s implied covenant of fair and honest consideration.

Despite the court’s finding in favor of the contractor on the merits of its claims, the court declined to grant the contractor’s request that the court terminate performance of the awarded contract because the majority of the work required by the contract had already been performed by the time the court issued its decision. The reason that the contract had neared completion was because the contractor was required by regulation to exhaust the USPS’s unique protest process (discussed in detail below) before filing suit in the U.S. Court of Federal Claims and the USPS’s protest process, unlike with timely filed protests at the Government Accountability Office (‘‘GAO’’), does not provide for an automatic stay of contract performance. However, the court did order the USPS to pay the contractor’s bid preparation and proposal costs and there is still the possibility that the contractor will recover a portion of its attorneys’ fees under the Equal Access to Justice Act.

As noted above, the U.S. Court of Federal Claims’ decision in J.C.N. Construction, Inc. is noteworthy because, among other things, it highlights little-known issues and risks that exist when contracting with the USPS and it serves as a great opportunity to examine the USPS’s unique bid protest process. In the next section of this article, these issues and risks as well as the USPS’s bid protest process are explained more fully for the benefit of the reader.

USPS ‘Protest’ Process. The GAO’s Bid Protest Regulations state, in pertinent part: ‘‘Protests of procurements or proposed procurements by agencies such as the U.S. Postal Service, the Federal Deposit Insurance Corporation, and non-appropriated fund activities are beyond GAO’s bid protest jurisdiction as established in 31 U.S.C 3551-3556.’’ See 4 C.F.R. § 21.5(g) (emphasis added). The reason that the GAO does not have jurisdiction over protests challenging USPS procurements was articulated succinctly by the U.S. Court of Appeals for the Federal Circuit in a published decision from 2001:

The GAO’s protest jurisdiction is defined by the Competition in Contracting Act (‘‘CICA’’) of 1984, 31 U.S.C. § 3551 et seq. The USPS is exempted from all federal procurement laws not specifically enumerated in 39 U.S.C. § 410(a). United States v. Elec. Data Sys. Fed. Corp., 857 F.2d 1444, 1446 (Fed.Cir.1988). Because the [the Competition in Contracting Act (CICA)] is not specifically enumerated in 39 U.S.C. § 410(a), the CICA does not apply to the USPS and therefore the USPS is not subject to GAO review.

Emery Worldwide Airlines, Inc. v. United States , 264 F.3d 1071, 1079 n. 7 (Fed. Cir. 2001).

Despite the fact that the GAO cannot decide protests involving USPS procurements, the USPS has its own unique bid protest (i.e., ‘‘disagreement’’) process and the U.S. Court of Federal Claims has consistently held that it has jurisdiction over protests involving USPS procurements. The USPS’s disagreement resolution procedures are set out in 39 C.F.R. § 601. These regulations establish a procedure under which a contractor can file a protest (or ‘‘disagreement’’) concerning the USPS’s acquisition of services or property. The USPS ‘‘disagreement’’ process is essentially a two-step process that should be exhausted before a contractor files a bid protest action at the U.S. Court of Federal Claims.

Step One. The first step in the USPS process is to ‘‘lodge’’ (i.e., file) the disagreement with the contracting officer. Contractors must lodge their disagreement within ten calendar days from when they first become aware of the grounds for disagreement. If, on the other hand, a contractor is challenging the terms of a solicitation, then the contractor must lodge the disagreement before offers are due. As mentioned above, however, the USPS disagreement process does not provide for an automatic stay of the contract award upon the receipt of timely filed protests. A contractor may request that the CO suspend contract performance pending resolution of the protest; however, the CO is not required to grant such a request. Once a contractor has lodged its disagreement, the CO has up to ten calendar days to review the challenge and issue a response. In addition, an alternative dispute resolution (‘‘ADR’’) mechanism may be used, if the parties so desire. If the protester is satisfied with CO’s resolution of the matter, then the process ends. If, however, the contractor is not satisfied with the CO’s resolution of the disagreement, or if the CO has not responded within ten calendar days after the disagreement was lodged, then the contractor may proceed to the second step of the process.

Step Two. The second step is for the contractor to lodge the disagreement with the Supplier Disagreement Resolution Official (‘‘SDRO’’) at USPS Headquarters in Washington, D.C. In order to be timely, contractors must lodge the disagreement with the SDRO within ten calendar days after the CO issued a decision on the protest, or within ten days of when the CO should have issued a decision. The SDRO may grant an extension of time to lodge a disagreement, but the regulations state that any request for an extension must set forth the reasons for the request, be made in writing, and be delivered to the SDRO on or before the time for lodge a disagreement lapses.

Upon receipt of a disagreement, the SDRO will provide a copy of the disagreement to the CO, who, in turn, will notify other interested parties. The SDRO will then review the disagreement and, if necessary, obtain further information from the protester and the CO. Next, the SDRO will issue a written decision – something which typically is done within thirty days after the SDRO’s receipt of the disagreement. Such written decisions usually are published by the USPS on its website. The SDRO has the authority to grant various remedies, including but not limited to: (1) directing the USPS to terminate the contract award; (2) directing the USPS to issue a new solicitation; (3) directing the USPS to conduct a recompete of the requirements; and (4) directing the USPS to conduct a reevaluation of proposals submitted in connection with the procurement under protest.

If a protester is not satisfied with the SDRO’s decision, the decision ‘‘may be appealed to a Federal court with jurisdiction based only upon an alleged violation of the regulations contained in this part or an applicable public law enacted by Congress.’’ See 39 C.F.R. § 601.108(h). While this particular regulatory provision seems to limit the issues that may be ‘‘appealed’’ to a Federal court, the fact of the matter is that the U.S. Court of Federal Claims has taken jurisdiction over issues that do not necessarily fall neatly under this regulatory provision. The reason for this is because thec ourt – rather than the USPS – decides the extent of its jurisdiction over bid protest actions under the Tucker Act. As with protests arising from non-USPS procurements and protests that originate in the GAO, the U.S. Court of Federal Claims will not be bound by prior protest (or ‘‘disagreement’’) decisions. Instead, the U.S. Court of Federal Claims will conduct its own independent review and will apply the ‘‘arbitrary and capricious’’ standard set forth in the Administrative Procedures Act (‘‘APA’’).

Moreover, the regulations governing the USPS ‘‘disagreement’’ process seek to require contractors to ‘‘exhaust’’ their administrative remedies before bringing a challenge in federal court. While some commentators have suggested that this regulatory provision is, in effect, unenforceable since the U.S. Court of Federal Claims determines the extent of its bid protest jurisdiction, many practitioners opt to ‘‘exhaust’’ the USPS disagreement process out of an abundance of caution and also because they can potentially save their clients money if they achieve a satisfactory result at the lesscostly USPS level.

While the USPS disagreement process generally is a cheaper route than pursuing a protest at the U.S. Court of Federal Claims, there are drawbacks to the USPS process. For instance, as mentioned above, the USPS process does not provide for an automatic stay of the contract award upon the receipt of a timely filed protest. In addition, contractors and their attorneys generally are afforded little access to the procurement record during the USPS disagreement process. Furthermore, unlike with protests at the GAO and the U.S. Court of Federal Claims, a formal protective order process does not exist at the USPS-level.

The FAR Does Not Apply To the USPS. In prosecuting a disagreement before the USPS, it is important to remember that the Federal Acquisition Regulation – which is the governmentwide procurement regulation that governs the federal contracting process for most civilian and military agencies – does not apply to the USPS. Rather, the USPS’s Supplying Principles and Practices govern the contracting process for the USPS.

The USPS has taken the position that since the Supplying Principles and Practices have not been formally issued as regulations, they are not binding on the USPS. The fact that the USPS’s Supplying Principles and Practices may be viewed as non-binding can present some difficulty for protesters challenging the USPS’s conduct at the U.S. Court of Federal Claims because the USPS can argue that any violation of the Supplying Principles and Practices is not ‘‘arbitrary and capricious’’ conduct since the USPS’s Supplying Principles and Practices are merely guidelines. Nevertheless, protesters, like the one in JCN Construction, Inc., can argue that actions by the USPS that are contrary to the USPS’s Supplying Principles and Practices are evidence of ‘‘arbitrary and capricious’’ conduct.

Conclusion. While one can debate the pros and cons of the USPS disagreement process, one thing that is not up for debate is that it is important for contractors and government contracts practitioners to be familiar with the unique issues associated with challenging a USPS procurement. The JCN Construction Inc. case is noteworthy for various reasons – not the least of which is that it highlights for practitioners and contractors alike the little-known quirks and risks of contracting with the USPS and it serves as a great opportunity to examine the USPS’s unique bid protest process.

Republished with permission. This article first appeared in Law360 on January 22, 2013.